Despite relatively strong income growth, American consumers are still reluctant to spend as they wait to see the full impact of cuts to federal programs, tariffs, and long-lingering inflation.
Consumer spending increased 0.4% in February, a rebound from January’s 0.2% decrease, but economists warn that this number represents an unimpressive recovery, especially given a 0.9% increase in household incomes during the same period.
Graph showing weak spending for the first two months of 2025.
The cautiousness of consumer spending in February shows that even before tariffs are in place, households are bracing for uncertain economic times ahead.
“As we say, it’s not that the consumer can’t buy goods and services right now, it’s that they’re unwilling,” said Stan Shipley, Managing Director and Fixed Income Strategist at ISI Group. “They’re concerned about uncertainty on tariffs, job growth, and a lot of other issues.”
That concern is certainly true for Eva Dejong, 35, who works as a director of clinical operations and research at PEGUS Research in Portland, OR. She and her husband have an 8-month-old child and are both paying off medical loans. Until January, her husband had been paying into a federal loan-forgiveness program, but under President Trump that program is on the chopping block.
If that loan forgiveness program goes away, Dejong says, “We are going to have to make very major adjustments to our life. We might have to sell our house because his payments could double, triple, even quadruple.”
In the meantime, Dejong says that she’s spending less on anything that isn’t necessary while the future of her family’s loan repayments hangs in the balance. “Honestly, that unknown, I probably think about it multiple times a day,” she said. “It’s just so consuming, because it really affects every part of your life.”
Incomes rose in February in part thanks to a resilient labor market and annual adjustments to social security. However, that supplemental income didn’t drive consumers to increase their spending.
Federal policy limbo and federal cuts also showed up as a drop in non-profit expenditures, which fell by more than fifteen billion dollars in February. While it’s still too soon to see the full impact of federal funding cuts, that drop in non-profit spending could mean that organizations are tightening their belts, bracing for tough financial times ahead.
Meanwhile, inflation remained at 2.5% in February, above the Fed’s 2% goal, exacerbating uncertainty around policy. Core inflation, which is a measure of inflation that excludes volatile energy and food prices, remained at 2.8%.
The Fed continued their pause on interest rate cuts earlier this month, a move which economists say is now validated by February’s persistent inflation.
“Certainly this helps support the Fed’s most recent action of keeping no change to the Fed funds rate target and revising higher their inflation expectations for this year,” said Sam Bullard, senior economist at Wells Fargo.
A series of international tariffs announced by Trump on close trading partners like Canada and Mexico, as well as on materials like steel and aluminum, are also having an impact on inflation. According to Bullard, these policies would increase inflation by themselves, but regardless they seem to be causing a level of uncertainty that in and of itself has an impact on inflation, before tariffs even go into effect.
“Officials are very cautious about the inflation outlook with the tariffs that are coming into focus now,” Bullard said. “Certainly it’s weighing on businesses’ and consumers’ inflation expectations, which have picked up substantially since the start of the year. That can have some bleed over effect into higher prices.”
Dejong has also been feeling the pressure of high service prices, particularly those of childcare, which for her family are about $2,000 per month.
“I’m a decently high earner compared to the average American,” she said. But the high costs of childcare “made me question if I should even go back to work. And I wanted to work, but you’re like, man, is this worth it to pay for all of this?”